Oda Russian Commercial Law 2007-1

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There is a proposal to create one or two intermediate levels of court between the Federal Supreme Court and the courts of the constituent entities as is the case with the commercial court system.28

Unlike its predecessor under socialism, the Supreme Court does not have a special statute as yet.

According to the 2004 statistics, district courts accepted a total of 2,300,000 civil cases. These include the following:

Table 3 Cases Heard by District Courts in 2004

Family Law Cases

Establishment of Paternity	7,900
Recognition of Paternity	6,900
Deprivation of Parental Rights	63,700
Adoption	14,600
Divorce	62,200
Payment of Alimony	24,700
Inheritance	36,400
Breach of Traf c Rules and Traf c Accidents	11,300
Housing Cases
Privatisation of Housing Spaces	16,600
Eviction	45,600
Other housing disputes	214,500
Employment Cases
Reinstatement to Work	34,000
Compensation of Loss arising from Employment Relations	4,600

28M.I.Kleandrov, “O tselesoobraznosti kodi katsii zakonodatel’stva o sudakh I sud’iakh”, RIu 2006, No.1, p.15.

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Table 3 (continued)
Cases Arising from Public Law Relations
Infringement of Voting Rights		3,300
Acknowledgement of Normative Legal Acts as unlawful		5,700
Action against Unlawful Acts of Government Of cials		65,200
Compensation for Environmental damage		1,800
Protection of Consumers		24,900
*Disputes involving the Ownership of Land	8,500 (in the rst half of 2005)

(RIu, 2005 No.6, pp.33-35, 2006 No.1, p.35: complete information is not available now)

4)Jurisdiction of the Ordinary Court and the Commercial Court

The demarcation of competence between the ordinary court and the commercial court has been confusing from the outset.According to the Code of Commercial Court Procedure of 1995, the commercial court handled “economic disputes arising from civil, administrative and other legal relations, between juridical persons, physical persons who perform entrepreneurial activities without forming a juridical person and are licensed as an individual entrepreneur”. It had quite an extensive non-exhaustive list of economic disputes which are to be handled by the commercial court. On the other hand, the Code of Civil Procedure before 2002 provided that ordinary court has competence over “civil, family, labour, and kolkhoz related cases”.

There was an overlap of jurisdiction of both courts in various areas. For example, disputes between juridical persons generally could be handled both by the commercial court and the ordinary court. Under the 1995 Law, the commercial court had jurisdiction over cases involving foreign organisations, organisations with foreign investment, international organisations, foreign citizens and citizens without nationality who perform entrepreneurial activities, insofar as there is no international agreement which provides otherwise. However, the Code of Civil Procedure also provided that ordinary courts have jurisdiction over cases involving foreign citizens, juridical persons and organisations. The Supreme Court acknowledged in 1996 that disputes involving foreign companies and organisations fall within the competence of both courts.29

29Decision of the Civil Division of the Supreme Court, November 28,1996 in A.P.Ryzhakov and D.A.Sergeev eds., Postateinyi kommentarii: Grazhdanskii protsessual’nyi kodeks RSFSR, Moscow 1999, p.75.

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The problem was compounded by the fact that although the competence of the commercial court was fairly clear in the Code of Commercial Court Procedure, the corresponding provision in the Code of Civil Procedure was not amended after the commercial court came into operation. There was no legal basis to exclude those disputes listed in the former from the competence of the ordinary courts. Experts agreed that the provision of the Code of Civil Procedure which determines the competence of the ordinary court has “become hopelessly obsolete”.30 A joint decision of the Plenums of the Supreme Court and the Supreme Commercial Court in 1992, which, inter alia, stated that when the law does not clearly demarcate the boundary of competence of the courts, the jurisdiction should be determined primarily by whether both parties were juridical persons, or whether either of them was a non-juridical person. In the latter case, ordinary courts had jurisdiction.

The solution was that the competence of courts should be determined by way of exclusion, i.e. the Code of Commercial Court Procedure is rst applied, and the ordinary court handles cases which do not fall within the competence of the commercial court determined by the Code.31 However, this solution was not really convincing. The Law on Joint-Stock Companies provides for various remedies including a shareholder’s action, i.e. an action of a shareholder vis-à- vis members of the board or executive body. In such cases, if the defendant is an of cer, i.e. a physical person, the case will be considered by the ordinary court. If the defendant is the company and the plaintiff-shareholder is a juridical person, the case falls within the competence of the commercial court.32 This is an odd arrangement – the subject matter is the same, but depending on the parties, the case is heard by different courts. If the raison d’être of a commercial court is to have commercial cases handled by specialist judges subject to special procedural rules, certainly, these cases should be handled solely by the commercial court. However, a joint decision of both courts found this to be within the jurisdiction of both courts.

There was major progress regarding the jurisdictional problem with the enactment of the new Code of Commercial Court Procedure and the Code of Civil Procedure in 2002. According to the general provision on jurisdiction in the Code of Commercial Court Procedure, the commercial court has jurisdiction over “economic disputes and other cases concerning the carrying out of entrepre-

30M.Shakarian ed., Grazhdanskoe protsessual’noe pravoe Rossii, Moscow 1999, p.129.

31Ibid., p.130; Ryzhakov and Sergeev, supra, pp.64-65.

32Iu.Mateleva, Pravovoe ppolozhenie aktionera v aktionernom obshchestve, Moscow 1999, p.175.

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neurial and other economic activities” (Art.27, para.1). The court handles cases in which juridical persons and licensed individual entrepreneurs who carry out business without forming a juridical person take part. In cases provided for by the Code and other Federal laws, the Russian Federation, constituent entities, state and local agencies etc. may also be a party (ibid., para.2). The commercial court also handles cases with the participation of Russian and foreign juridical persons, Russian and foreign individuals as well as international organisations (ibid., para.5).

Following this general provision, the Code provides for the following categories of cases which fall within the jurisdiction of the commercial court:

i) cases arising from civil law relations (Art.28);

ii) cases arising from administrative and other public law relations (Art.29); iii) cases involving the establishment of facts which have legal signi cance

(Art.30);

iv) cases involving contesting and enforcement of arbitral awards (Art.31); v) cases involving recognition and enforcement of foreign judgments and arbitral

awards (Art.32).

The last category of cases were under the jurisdiction of both courts until these new Codes were enacted.

The general provisions as well as (i) do not necessary contribute much to the demarcation of jurisdiction between the two courts, since they lack speci cs. What is important is the provision on “special jurisdiction” of the commercial court. This provision lists the following cases to be within the commercial court’s jurisdiction (Art.33, para.1):

i) insolvency;

ii) disputes involving establishment, reorganisation, and liquidation of organisations;

iii) refusal and failure to register juridical persons and individual entrepreneurs; iv) disputes between shareholders and joint stock companies, between members of other commercial companies and partnership arising from the activities of

the companies and partnerships, except for labour law disputes; v) protection of business reputation;

vi) other cases emerging from the carrying out of entrepreneurial activities and other economic activities provided for by Federal law.

These cases are handled by the commercial court, regardless of whether the parties to the above disputes are juridical persons, individual entrepreneurs, other organisations or individuals (ibid., para.2). This provision makes the demarcation of jurisdiction much easier.

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On the other hand, the new Code of Civil Procedure provides that ordinary courts are to handle cases with the participation of individuals, organisations, Federal and local agencies involving disputes arising from civil, family, labour, housing, land, environment, and other relations (Art.22, para.1). Ordinary courts also handle disputes in which foreign individuals, organisations, and international organisations participate (ibid., para.2). However, there is a provision to the effect that the ordinary courts are to handle these cases, except where Federal law or Federal constitutional law leaves it to the jurisdiction of the commercial court (ibid., para.3).At the same time, the Code provides that if there are several inter-related claims of which one falls within the jurisdiction of the commercial court and the other within the jurisdiction of the ordinary court and the claims are not separable, the case is to be handled by the ordinary court (ibid., para.4).

Thus, the enactment of the new Codes, particularly Article 33, para.1, subpara.4 of the Code of Commercial Court Procedure, made the demarcation much clearer than before, but there still remains some ambiguity. For example, disputes between shareholders, shareholders and a third party etc. may fall within the jurisdiction of the ordinary court as before, insofar as they are individuals and not juridical person, as the Supreme Court pointed out in its review of cases in 2003.33

5)Jurisdiction of Russian Courts in Cross-Border Disputes

The Code of Commercial Court Procedure has a provision on the competence of the commercial court in cases involving foreign persons (Art.247). Russian commercial courts have jurisdiction over the following cases where a foreign organisation, a foreign individual or an individual without nationality who carry out entrepreneurial and other economic activities, or an international organisation is a party:

i) the defendant is located or lives in the territory of the Russian Federation, or the defendant’s assets are located there;

ii) a management body, a branch, or a representative of ce of a foreign juridical person is located in the territory of the Russian Federation;

iii) the dispute arose from a contract which was to be performed, or was performed in the territory of the Russian Federation;

33S.Potapenko, “O razgranichenii podvedomstvennosti grazhdanskikh del sudam obshchei jurisdiktsii i arbitrazhnym sudam”, KhiP, 2004 No.5, pp.77-78.

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iv) the claim arose from a harm caused to property by an act or other circumstances which took place in the territory of the Russian Federation or the loss took place in the territory of the Russian Federation;

v) the dispute arose from unjust enrichment which took place in the territory of the Russian Federation;

vi) the plaintiff in a case involving the protection of business reputation is in the territory of the Russian Federation;

vii) the dispute arose from a relationship involving the circulation of securities which were issued in the territory of the Russian Federation;

viii) the applicant for the establishment of facts which have legal signi cance indicates of the existence of such facts in the territory of the Russian Federation; ix) the dispute arose from the relationship involving the registration of names and other objects and providing of service through the Internet in the territory of

the Russian Federation;

x) Other cases where the disputed legal relation has close connection with the territory of the Russian Federation.

The commercial court also has jurisdiction in the following cases, regarding which the Code grants exclusive jurisdiction to Russian courts (Art.248, para.1):

i) disputes in relation to property which belongs to the state, including disputes concerning privatisation;

ii) disputes involving real property located in the territory of the Russian Federation;

iii) disputes involving the granting of patents, issuing of certi cates for trademarks, industrial models and other intellectual property rights which require registration;

iv) disputes involving the recognition of invalidity of state registration;

v) disputes involving the establishment, liquidation, or registration of juridical persons and individual entrepreneurs in the territory of the Russian Federation.

The location of juridical persons and the residence of physical persons are determined by provisions of the Civil Code. The residence of a physical person is the place where this person permanently or primarily lives. The location of a juridical person is the place where it is registered (Art.20).

6)Independence of the Courts and Integrity of the Judges

Since perestroika, the Russian court system has undergone signi cant changes. The independence of the court has been reinforced by law and the authority of the court has gradually increased.

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In addition to the provision of the Constitution which guarantees the independence of the court, the Law on the Status of Judges provides for the independence of judges. This is guaranteed by the prohibition of interference with the course of justice at the pain of criminal sanction, the procedure for the termination of the power of the judges, and the principle of inviolability of judges (Art.9, para.1). According to this Law, “judges, their family and property are under the protection of the state.” Under the Criminal Code, interference with the court for the purpose of preventing justice is punishable by deprivation of freedom (Art.294, para.1).

Whether or not the courts have successfully gained independence and authority in reality is questionable. Disrespect of the court is reported from time to time. In November 1999 in St.Petersburg, a group of armed and masked members of the “special division” of the Ministry of InternalAffairs forced their way into the court room and snatched a person who was standing trial. The conference of judges of St.Petersburg adopted a resolution criticising the Ministry and demanding that appropriate measures be taken by the Procurator-General.34 In 2000, it was reported that there were 22 incidents of injury to judges and 18 incidents of arson involving court buildings.35

Judges do not always behave with integrity.

A judge of the regional court was assigned to a criminal case with P as a defendant. The trial was to take place in the district court of the town of K on June 30, 1999. The relatives of the victim who was killed as well as witnesses, including a close friend of the defendant, were summoned to the trial.According to the police record, this friend of the defendant was a member of a criminal group. The judge arrived in the town on the day before the trial. He was put up in a hotel, but then, moved to the house of a private entrepreneur N. The procurator and the advocate in the same case were staying in the same house. That evening, a friend of the defendant organised a banquet in which the judge, the procurator, and the advocate, together with the organiser of the banquet, took part and had a drink. On the day of trial, the judge had a serious hangover and the trial was postponed until July 1st. Members of the court did not turn up to the trial. The verdict which was eventually handed down was extremely lenient.36

It was reported that disciplinary action was brought against 310 judges and heads of the court in 2003. 240 of them, including a judge of the Supreme Court of a constituent republic, and 21 presidents of the district court, were disciplined. The

34RIu, 2000 No.2, p.2.

35Ibid., p.6.

36“Novyi shag k otkrytnosti i glasnosti”, RIu 2002, No.11, p.99.

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terms of seven presidents of the district court and two senior judges at the higher level courts were terminated prematurely. The majority of these cases involved grave and repeated breaches of procedural law and neglect of duty, but there were some other problems. For example, a president of the district court was reprimanded for interference with the composition of the court. Two presidents and three judges of district courts were dismissed for falsi cation of court documents. Four criminal cases were initiated against judges, in two of which, judges were imprisoned for intentionally delivering unlawful verdicts.37

The President of the Supreme Court of cially acknowledged that “corruption, abuse of power by judges do exist, alas, but there is nothing we can do about it.”38

There are also cases where “local pressure”, which used to be common under socialism, was exerted on the judges. The head of administration of the Volgograd province was reported to have asked the commercial court as well as the ordinary court in the capital to suspend or postpone the proceedings in and enforcement of some categories of cases in relation to the “extraordinary situation” in the region.39 Acommercial court judge, who reportedly “ran afoul of the local governor”, was disquali ed by the quali cation committee in Primorskii Region.40

The poor nancial state of the court is also regarded as a threat to its independence. In 1998, despite the constitutional guarantee regarding the nancing of courts, the Ministry of Finance substantially cut the budget allocated to the courts. The Constitutional Court found this to be against the Constitution, but the situation was not recti ed. Local courts were forced to ask for resources from the local government as well as from “commercial organisations”.41 As a result of the reform in the early 2000s, the nancial state of the courts seems to have improved.

In recent years there have been some prominent cases which have raised questions regarding the independence of the court from political pressure.

One such case involved Sidanco, which was the fth largest oil company in Russia. In 1998, a bankruptcy petition was led for Sidanco’s three subsidiaries, followed by a petition for Sidanco itself the next year. This was an example of the previous Insolvency Law abused as a means of corporate takeover. The

37www.supcourt.ru.

38Ibid.

39“Verkhovenstvo konstitutsii RF i federal’nykh zakonov – osnovnoi pravovoi printsip”. KhiP 2000 No.1, p.38.

40RFE/RL Newsline, September 22, 2000.

41RIu, 1999 No.1, p.3. See also G.T.Ermoshchin, “Problemy obespecheniia nazavisimosti sudebnoi vlasti”, in Iu.A.Tokhomirov et al. eds., Sudebnaia reforma v Rossii, Moscow 2001, p.23.

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insolvency procedure was handled by the local commercial court, but on various occasions, the court failed to ensure the fairness of the activities of the bankruptcy administrator, siding with a competitor of Sidanco.At one stage, Sidanco was forced to le petition for the transfer of the case to another court.42 What was more, the Supreme Commercial Court itself succumbed to political pressure and changed its position within a month.

The latest case involves Iukos, another oil company, which was in the end dismantled and its assets indirectly put under state control. The company was confronted with an enormous amount of tax claims and penalties from the tax agency. It should be noted that it was not only Iukos, but also other oil companies that faced similar claims. The difference was that other companies managed to settle the claims at a signi cantly low payment, whereas Iukos was not allowed to settle. Iukos brought more than 30 actions involving tax law to the commercial court, but never won a case. Even the provision of three year prescription period for tax arrears in the Tax Code was not applied to Iukos. Thus, this was a selective or discriminatory application to a company run by the president’s political opponent. This incident was an example of the strengthening of state control in the natural resources industry and seems to be nothing less than creeping nationalisation.

2INTERNATIONAL COMMERCIAL ARBITRATION

1)Arbitration Law and Institutions in Russia

Foreign investors have little choice when it comes to formulating a dispute resolution clause. They are understandably reluctant to have disputes submitted to Russian courts, which are not particularly known for their independence and fairness and, even if they manage to persuade the Russian party to accept the jurisdiction of a foreign court, they would be unable to enforce a foreign judgment in Russia without a treaty providing for such enforcement. Hence, lenders cannot, for example, designate New York or English courts in loan agreements with Russian entities, as they customarily do with foreign borrowers. The only realistic option available to them is arbitration.

International commercial arbitration has long played an important role in settling disputed between Russian and foreign commercial entities. The two leading arbitration institutions in Russia – the International Commercial Arbitration

42Project Finance International, June 2, June 16, October 6, December 1, 1999; New York Times, November 24, 1999; Eastern European Energy, September issue 1999, pp.11-12.

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Court (MKAS) and the Russian MaritimeArbitration Commission (MAK), both attached to the Chamber of Commerce and Industry of the Russian Federation – date back to the 1930s and have a fairly good track record in settling international commercial disputes. Since the 1970s, Russian entities have also agreed to arbitration outside Russia. Although it is called a “court” now, MKAS is an arbitration institution, and should not be confused with the “arbitration court (arbitrazhnyi sud)”, which is in fact a commercial court in Russia, as explained above.

In the socialist period, occasionally, the neutrality of the Soviet arbitration institutions was questioned, but overall, these arbitration institutions maintained their credibility throughout that time.43 On the other hand, there were some inconveniences, such as the mandatory use of Russian language and the limited choice of arbitrators. In the majority of East-West joint-ventures and major projects, Stockholm, and not Moscow, was chosen as the venue of arbitration.44

A new Law on International Commercial Arbitration was enacted in Russia in 1993. This Law is applicable to commercial arbitration, including ad hoc arbitration, conducted in Russia. The Law has a preamble in which it is explicitly stated that it recognises the usefulness of arbitration as a widely applied method of settling disputes in international trade and takes account of the UNCITRAL Model Law on International Commercial Arbitration. Like the Model Law, the International Commercial Arbitration Law forbids any intervention by State courts except as provided in the Law.

International arbitration institutions in Russia handle the following cases upon agreement of the parties (Art.1, para.2):

i) civil law disputes which emerge in the course of foreign trade and other foreign economic cooperation in which at least one of the parties is a foreign commercial organisation;

ii) disputes between companies with foreign participation, international organisations established in Russia as well as disputes between these bodies and Russian juridical persons.

MKAS handles around 500 cases every year. More than 30% of the foreign parties are from the United States and Western Europe.

43See the case involving an Israeli company and a Soviet foreign trade organisation in 1958 at the time of the war in the Middle East, M.M.Boguslavskii, Mezhdunarodnoe chastnoe pravo, third edition, Moscow 1999, pp.140-141.

44V.Viechtbauer, “Arbitration in Russia”, Stanford Journal of International Law, 1993, pp.371374.